Dollar subdued as U.S. midterms get underway; Aussie Hits 2-week low

 The U.S. dollar traded on the defensive on Tuesday as currency markets braced for the outcome of high-stakes U.S. midterm elections, while the Australian dollar slid to a near two-week low following a divided rate hike by the Reserve Bank of Australia and the euro consolidated. 

The U.S. Dollar Index fell 0.12% to 101.69, amid caution ahead of election night results and Friday’s crucial October employment report.

Trading desks were dominated by the opening of polling stations across the United States, where voters are set to deliver a verdict on the first two years of President Donald Trump’s second term.

With all 435 seats in the House of Representatives and 35 Senate seats up for contention, nonpartisan forecasts and prediction markets continue to favor Democrats to regain control of the House, while the Senate race remains tightly contested.

A Democratic sweep or divided government would introduce legislative gridlock, dampening expectations for further fiscal stimulus while setting the stage for protracted showdowns over federal spending caps and the debt ceiling in 2027. Conversely, an unexpected Republican hold across Congress would preserve the path for aggressive trade tariff implementation and corporate tax preservation.

The election cross-currents are keeping the greenback in check ahead of Friday’s nonfarm payrolls release, where consensus anticipates a rebound of 100,000 jobs following a meager 29,000 gain previously.

RBA delivers ’dovish’ 25 bps hike

The Australian dollar was the session’s standout underperformer among major currencies, dropping 0.2% to $0.6988 and touching a near two-week low despite an interest-rate increase by the Reserve Bank of Australia.

The RBA raised its benchmark cash rate by 25 basis points to an 18-year high of 4.85%. However, foreign exchange desks interpreted the accompanying policy statement as a signal that the tightening cycle has reached its terminal ceiling.

The decision revealed a 6-3 board split, with three members voting to leave borrowing costs unchanged - a significantly more divided outcome than markets had discounted.

Furthermore, the RBA adjusted its characterization of monetary settings, describing domestic financial conditions as "restrictive" rather than "somewhat restrictive," prompting analysts to conclude that the bar for further tightening is exceptionally high.

The euro traded steady at $1.1100, consolidating after pulling back from an over one-week high touched on Monday.

While the single currency found baseline support from the broader dollar pause, upside momentum remained capped by lingering sovereign credit concerns across the euro zone.

Investors continue to digest Fitch’s decision late Friday to revise France’s credit outlook to negative from stable, citing parliamentary gridlock, rising debt service burdens, and an expanding fiscal deficit that threatens medium-term consolidation.

Contrasting macroeconomic currents across the bloc - underscored by a 2% contraction in German September retail sales alongside sticky energy-driven inflation - have complicated expectations for the European Central Bank.

Having held the deposit facility rate at 2.50% last week, currency allocators are watching upcoming remarks by Governing Council members, including Bank of Spain Governor Jose Luis Escriva and Bank of France Governor Emmanuel Moulin, for guidance on the policy path heading into December.

In Asia, the Japanese yen edged slightly firmer to 157.80 per dollar in thin trading as Tokyo financial markets observed the Culture Day national holiday.